Appendix A

Scope and Methodology

In January 2016, the Joint Legislative Audit Committee approved a proposal by the California State Auditor (State Auditor) to perform an audit of the city of Maywood (Maywood) under the State Auditor’s local high risk program. We conducted an initial assessment of Maywood in July and August 2015 in which we reviewed the city’s financial and operating condition to determine whether it demonstrated characteristics of high risk pertaining to the following six risk factors specified in state regulations:

The local government agency’s financial condition has the potential to impair its ability to efficiently deliver services or to meet its financial or legal obligations.

The local government agency’s ability to maintain or restore its financial stability is impaired.

The local government agency’s financial reporting does not follow generally accepted government accounting principles.

Prior audits reported findings related to financial or performance issues, and the local government agency has not taken adequate corrective action.

The local government agency uses an ineffective system to monitor and track state and local funds it receives and spends.

An aspect of the local government agency’s operation or management is ineffective or inefficient; presents the risk for waste, fraud, or abuse; or does not provide the intended level of public service.

Our review identified concerns about Maywood’s financial condition, financial stability, and budgeting practices as well as the effectiveness of aspects of its operations. We also found that Maywood did not take adequate corrective action to address prior audit findings and failed to comply with generally accepted government accounting principles in its financial reporting. Table A lists the audit objectives and related procedures that address those risk factors.

Table A
Audit Objectives and the Methods Used to Address Them

AUDIT OBJECTIVE

METHOD

1

Review and evaluate the laws, rules, and regulations significant to the audit objectives.

Reviewed relevant laws, regulations, and other background materials applicable to the city of Maywood (Maywood).

Reviewed Maywood’s municipal code and relevant city policies and procedures.

2

Review and evaluate the laws, rules, and regulations significant to the audit objectives.

Reviewed Maywood’s audited financial statements for the prior five fiscal years (2010–11 through 2014–15) to determine the city’s financial condition and its ability to pay its obligations when due.

Conducted interviews with key city staff and contractors as well as representatives of the California Joint Powers Insurance Authority and CalPERS to assess Maywood’s efforts to negotiate a repayment plan for its major overdue obligations.

3

Assess the city’s ability to maintain a balanced budget in the coming years, including the following:

a. The reasonableness of the city’s revenue assumptions, in particular assumptions related to economic growth.

b. The analysis supporting expected expenditures and how the city ensures projections are reasonable.

The city’s ability to monitor the budget throughout the year and to respond to decreased revenue and increased expenditures.

Found that Maywood’s projections for fiscal years 2016–17 and 2017–18 are based on realistic assumptions and are in line with actual revenue and expenditures the city reported during the prior years.

c. The city’s ability to monitor the budget throughout the year and to respond to decreased revenue and increased expenditures.

Assessed whether Maywood adequately monitored revenue and expenditures from fiscal year 2010–11 and 2014–15 by doing the following:

- Determining whether city management sought approval of a budget augmentation, as required, when its actual expenditures exceeded levels approved by the city council.

- Analyzing its actions when it received more or less revenue than it budgeted.

4

Examine the city’s operational structure and assess its management controls and practices. Determine whether controls over significant financial and administrative functions are adequate to identify, prevent, and address waste, fraud, abuse, and conflicts of interest.

Reviewed internal control reports issued by Maywood’s external auditor for fiscal years 2011–12 through 2014–15 to determine whether the city corrected in a timely manner the identified weaknesses in its internal controls.

5

Determine the extent to which the city council and city manager exercise adequate oversight of the city’s financial and administrative operations.

Evaluated city council’s oversight of the former city manager by reviewing the existing record of performance appraisals and contract extensions approved for the former city manager.

Reviewed city council meeting agendas and minutes as well as other relevant documents to assess decisions the city council made concerning personnel changes, approvals of contracts, and other important functions of the city government.

Interviewed the former city manager and city staff to understand the extent of oversight of city operations provided by the former city manager and specific decisions she made during her tenure, which extended from 2010 to 2015.

Evaluated the effectiveness of the former city manager’s oversight by reviewing various reports and documents as well as by performing testing of contracts and revenue described below.

6

Assess the cost‑effectiveness of Maywood’s expenditures on behalf of its residents.

Selected six contractors with the largest billings and those that provided vital services to the city for in‑depth testing.

For the selected contractors, assessed Maywood’s compliance with the procurement requirements contained in Maywood’s municipal code, relevant provisions of state law, and contract terms.

7

Review and assess any other issues that are significant to the audit.

Tested city council’s compliance with the provisions of the Brown Act during city council meetings held between December 2015 and May 2016.

Evaluated the quality of Maywood’s current and past three budgets using best practices developed by the Government Finance Officers Association for its Distinguished Budget Presentation Award program.

Assessed the extent to which Maywood undercollected revenue from parking citations and business license fees by analyzing data obtained from Maywood’s business license and parking databases for those functions and other relevant information.

Reviewed a selection of Maywood’s lease agreements and related collections data to determine whether the city obtained all revenue from these sources to which it was entitled.

Assessment of Data Reliability

In performing this audit, we relied upon various electronic data files obtained from Maywood. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer processed information that is used to support our findings, conclusions, or recommendations. We used Maywood’s Abila MIP Fund Accounting system to determine revenue and expenditure amounts to assist our analysis of the city’s financial condition and to quantify the city’s spending on specific contracts. We also used Maywood’s business license database, HdL Prime, to determine whether certain businesses operating in Maywood obtained a business license and to calculate the number of businesses with current and expired business licenses. Finally, we used Maywood’s Phoenix Information System’s WINCITE Parking Citation Program to determine the number and dollar value of parking citations the city issued during the period from October 2015 through June 2016. However, we did not perform accuracy and completeness testing on the data because this audit is most likely a one‑time review of a city, and we determined it did not warrant the same level of resource investment as a state agency whose systems produce data that may be used during numerous future audit engagements. As a result, we assessed that the data were of undetermined reliability. Although this determination may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations.

Appendix B

The California State Auditor’s High‑Risk Local Government Agency Audit Program

California Government Code Section 8546.10 authorizes the California State Auditor (State Auditor) to establish a high‑risk local government agency audit program (local high risk program) to identify local government agencies that are at high risk for potential waste, fraud, abuse, or mismanagement, or that have major challenges associated with their economy, efficiency, or effectiveness. Regulations that define high risk and describe the workings of the local high risk program became effective July 1, 2015. Both statute and regulations indicate that the State Auditor must seek approval from the Joint Legislative Audit Committee (Audit Committee) to conduct high risk audits of local entities.

California Cities

To identify local entities that may be high‑risk, we analyzed publicly available information, such as financial reports and prior audit reports or analyses, for more than 450 California cities. Using this analysis, we identified various cities for which we performed a more detailed financial analysis. This detailed analysis included using the financial data to calculate fiscal indicators that may be indicative of a city’s fiscal stress. We also reviewed publicly available information to assess the city’s fiscal outlook over the next five years, using financial and budgetary reports and other information that could affect the city’s operations. We then analyzed the results to determine whether each city is at risk for potential waste, fraud, abuse, and mismanagement, or whether it has major challenges associated with its economy, efficiency, or effectiveness.

Based on our initial analyses, we identified six cities, including the city of Maywood (Maywood), which appeared to meet the criteria for being at high risk. To better understand the factors that led us to this determination, we visited each of the six cities and conducted an initial assessment to determine the city’s awareness of and responses to those issues and to identify any other ongoing issues that could affect our determination of whether the city is high‑risk. After conducting our initial assessment, we concluded that Maywood warranted an audit. In January 2016, we sought and obtained approval from the Joint Legislative Audit Committee to conduct an audit of Maywood.

If the local agency is designated as high‑risk as a result of the audit, it must submit a corrective action plan. If it is unable to provide its corrective action plan in time for inclusion in the audit report, it must provide the plan no later than 60 days after the report is published. It must then provide written updates every six months after the report is issued regarding its progress in implementing the corrective action plan. This corrective action plan must outline the specific actions the local agency will perform to address the conditions causing us to designate it as high‑risk and the proposed timing for undertaking those actions. We will remove the high risk designation when the agency has taken satisfactory corrective action.